The boom and bust in the residential real estate market has created a widespread dilemma for many people. Some individuals were unaware of the predatory lenders taking advantage of the market conditions. This lead to bad loans that have left many struggling financially. However, many buyers understood the lending parameters and made a conscious choice to take advantage of the opportunity in the marketplace. This has lead to a situation where many feel that, because of unethical lending practices, they are free to walk away from their contractual obligations. This activity asks that you consider the ramifications for all stakeholders and balance these considerations with your personal moral values.
Begin by reading Case 1.3: Just Drop off the Key, Lee located in Chapter One of our text Business Ethics.
Next, read and reflect upon the following in preparation for composing a case analysis:

Your moral principles imply that you should keep paying on your mortgage because you have signed a contract and made a promise to pay based on the terms of the loan.
You are counseled to walk away from your mortgage to better serve you and your family’s long term financial interest.
How do you decide what to do? Consider the implications in relation to theory and morality.
This particular assignment requires personal reflection. You may use a first person narrative in this essay. However, make sure that you keep this to a minimum to maintain flow and focus.

Then, develop your case analysis using the following five sections:

Section 1: Introduction and situational analysis. Describe the ethical dilemma, giving appropriate background information. The term “dilemma” implies that there are pros and cons to various options, even if some are clearly more socially acceptable than others. This is also where you do your situational analysis – identify factors related to the individual(s) involved (consider the readings from this module), company and managerial practices and policies, external factors such as economic pressure, and any other aspects of the situation that you believe helped create the dilemma. Do not tell the story of the chosen case, instead spend time on pulling out the relevant points that form the main thrust of the ethical dilemma.
Section 2: Stakeholder analysis. Identify the key stakeholders and how they are potentially impacted by the various options in the dilemma. Note that stakeholder analysis is particularly pertinent to the consequentialist approach, and that one of the challenges is in estimating positive and negative impacts on relevant stakeholders. Do the best you can, looking at both good and bad consequences for each stakeholder group. Make sure you summarize the overall situation and come to a conclusion about the greater good.
Section 3: Analysis based on ethical theories. Analyze the ethical dilemma using a relevant theoretical perspective, including, but not limited to ,cultural relativism (how it relates to cultural norms – what society would view as acceptable, as well as what is legal), teleology (looking at consequences and acting for the greater good), deontology (duties and principles), and virtue.
Section 4: Conclusion and recommendations. Up to now, you have been analyzing and comparing options. Here is where you pull together the different threads of your analysis and determine whether or not the company or individual did the right thing. Also, make recommendations about what should have been done. Make sure your justifications clearly flow from your analysis. Make managerial and policy recommendations that would help avoid similar ethical dilemmas in the future and provide guidance to help those facing a similar dilemma.
Section 5: References. List at least three sources (other than the articles provided, your text, or the case article) where you located additional information about the company and the associated ethical dilemma(s).
HINDSIGHT, THEY SAY, IS 20/20. So, in retrospect, it is not so surprising that the boom in real
estate prices of just a few years ago was followed by a painful collapse. Encouraged by low interest
rates and a willingness of banks to lend money to almost anybody, many people had jumped into
the housing market, sometimes buying expensive homes with mortgages they could barely afford,
based on the belief, celebrated in televisions shows like “Flip This House,” that housing prices
would continue to go up and up and up. But the law of gravity applies to housing prices, too, it
seems. Inevitably, the housing market cooled down, and housing prices stopped rising; then they
slowly reversed direction and began steadily declining. As a result, many people found themselves
making mortgage payments on homes worth far less than what they had originally paid for them.
Moreover, many of them had been talked into taking mortgages they didn’t really understand, for
example, mortgages with adjust- able rates or with special “balloon” payments due after a few
years, or that were too expensive for them to afford in the first place. The financial crisis of 2008
and the recession that followed only made things worse. Faced with monthly payments they could
no longer sustain, these borrowers lost
their homes through foreclosure. Widespread foreclosures, in turn, drove housing prices even lower,
leaving more and more homeowners—by 2010 an estimated 5.4 million of them— “under water,”
that is, with mortgage balances at least 20 percent higher than the value of their homes.
Consider thirty-year-old software engineer, Derek Figg. He paid $340,000 for a home in the Phoenix
suburbs. Two years later, its value had dropped to less than $230,000, but he still owed the bank
$318,000. As a result, Figg decided to stop paying his mortgage, defaulted on his loan, and walked
away from his home. Or consider Benjamin Koellmann. He paid $215,000 for an apartment in Miami
Beach, which three years later was worth only $90,000. Although still paying his mortgage, he is
thinking about following Figg’s example.
What distinguishes Figg and Koellmann from many other homeowners whose homes are under
water or who are in mortgage trouble is that both have good jobs and could afford to keep making
their monthly payments—if they chose to. Moreover, they are smart guys and knew what they were
doing, or thought they did, when they bought their homes. However, figuring that it would take
years for their proper- ties to regain their original value and that renting would be cheaper, they are
among a growing number of homeowners who have either walked away from their mortgages or
are considering it, not out of necessity, but because doing so is in their financial interest. Experts
call this “strategic default.” Or, in the words of an old Paul Simon song, “Just drop off the key, Lee,
and get yourself free.”
As any financial advisor will tell you, there are lots of good reasons not to default on a mortgage. A
foreclosure ruins a consumer’s credit record for seven years, and with a low credit score, one must
pay a higher interest rate on auto and other loans. Moreover, some states allow lenders to seize
bank deposits and other assets of people who default on mortgages. Benjamin Koellmann also
worries that skipping out on his mortgage might hurt him with a future employer or diminish his
chance of being admitted to graduate school. Still, there’s no denying that for some borrowers
simply mail- ing in the keys and walking away can make sense. But that leaves one question
unanswered: Do they have a moral responsibility to meet their financial commitments?
The standard mortgage-loan document that a borrower signs says, “I promise to pay” the borrowed
amount. A promise is a promise, many people believe; they think you should keep making your
mortgage payments even if doing so is inconvenient. In fact, 81 percent of Americans agree that it
is immoral not to pay your mortgage when you can. George Brenkert, professor of business ethics
at Georgetown University, is one of them. He maintains that if you were not deceived by the lender
about the nature of the loan, then you have a duty to keep paying. If everybody walked away from
such commitments, he reasons, the result would be disastrous. As Paola Sapienza, a finance
professor at Northwestern University, points out, each strategic default emboldens others to take
the same step, which he describes as a “cascade effect” with potentially damaging consequences
for the whole economy. Economist David Rosenburg adds that these borrowers were not victims.
They “signed contracts, and as adults should be held accountable.”
Others disagree. Brent White, a law professor at the University of Arizona, says that homeowners
should base the decision whether to keep paying or walk away entirely on their own interests
“unclouded by unnecessary guilt or shame.” They should take their lead from the lenders, who, he
says, “ruthlessly seek to maximize profits or minimize loss irrespective of concerns of morality or
social responsibility.” People who think like Professor White also argue that the banks fueled the
housing boom in the first place by loaning money, based on unrealistic appraisals of home values,
to people who were unlikely to be able to keep up their payments in order to resell those loans to
other investors. Others suspect a double standard. Homeowners are criticized for defaulting but
businesses often declare bankruptcy even when they have money in the bank and could keep
paying their bills. In fact, doing so is often thought to be a smart move because it trims their debt
load and allows them to break their union contracts.
Benjamin Koellmann, for his part, remains conflicted. “People like me are beginning to feel like
suckers. Why not let it go in default and rent a better place for less? . . . There is no financial sense
in staying.” Still, he struggles with the ethical side of the question: “I took a loan on an asset that I
didn’t see as overvalued,” he says. “As much as I would like my bank to pay for that mistake, why
should it?” John Gourson, chief executive of the Mortgage Bankers Association, concurs with this.
In addition, he says, defaulting on your mortgage and letting your home go into foreclosure hurts
the whole neighborhood by lowering property values. He adds: “What about the message they still
send to their family and their kids and their friends?” For his part, Derek Figg admits that defaulting
was the “toughest decision I ever made.” Still, he faced a “claustrophobic situation,” he says,
because if ever he lost or quit his job, he would have been unable to sell his house and move
somewhere else. Moreover, he says, lenders “manipulated” the housing market during the boom by
accepting dubious appraisals. “When I weighed everything,” he says, “I was able to sleep at night.”
Discussion Questions
1. What would you do if you were in Figg’s or Koellmann’s situation? What factors would you
consider?
2. Do people have a moral obligation to repay money that they borrow, as Professor Brenkert
thinks, or is this simply a business decision based on self-interest alone, as Professor
White thinks?
3. “It is morally permissible for homeowners whose homes are under water to default on their
mortgages even if they could continue to pay them.” What arguments do you see in favor of
this proposition? What arguments do you see against it?
4. When it comes to paying your debts, does it matter whether you borrow money from a bank
or from an individual person? Explain why or why not.
5. Suppose your moral principles imply that you should keep on paying your mortgage, but
financial self- interest counsels you to walk away. How are you to decide what to do?
6. Repaying a loan is a legal obligation. Is it also a moral obligation? Explain why or why not.
7. Are the banks responsible for the housing boom that enticed people to buy homes at
inflated prices? If so, does this affect whether you have an obligation to repay your loan?
What about Professor White’s contention that the banks themselves care only about
maximizing profit?

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